A New Era For Biofuels

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 |  Includes: AMRS, CDXS, CZZ, GEVO, KIOR, TVIA
by: Brett Korsgaard

This has been a bad year for publicly-traded biofuel makers. The hope and promise that kept such issues buoyant in their post-IPO honeymoon has dissipated into a sentiment of “show me the money”. Essentially shareholders and analysts began to wonder when revenue generation and profits would begin in earnest as the mantra of “be patient; good things around the corner” began to grow old. Let’s be honest, many of these IPO’s were rushed to market when optimism was high and the money from underwriters was easier to raise.

Company Share Price YTD Return Summary
Amyris $10.75 (52%) Highest profile investors and partnerships. High expectations slipping a tad but partner "Total" (NYSE:TOT) a backstop.
Solazyme $11.91 (50%) Algae based platform is gaining traction. Punches above weight and successful in courting partnerships.
Gevo $6.81 (65%) Just received key patent for isobutanol.
KiOR $17.51 15% Aggressive plant build-out in the works. Largest market cap at $1.7B. Investor pedigree and off-take contracts have kept issue relatively bouyant.
Codexis $5.80 (42%) Recent uptick attributable to traction in Royal Dutch (RDS) and Cosan (NYSE:CZZ) partnerships.
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Companies like Solazyme (SZYM), KiOR (NASDAQ:KIOR), GEVO (NASDAQ:GEVO), Amyris (NASDAQ:AMRS) and Codexis (NASDAQ:CDXS) were generally met with favorable terms in the public markets. The Street seemed to acknowledge that for a time, such public enterprises could coast as venture capital darlings with sequential quarters of red ink and cash burn, while a pipeline of off- take agreements and industry partnerships would eventually coalesce into abundant revenues and maybe profits down the road. While some of these agreements have materialized, the shareholders have been subjected to the capricious nature of a market that began to demand performance sooner rather than later. This is completely understandable in the context of the collapse of Solyndra and by extension many segments of the clean tech industry that have failed to meet the sparkly expectations of public and private venture capital investors.

While the underpinnings of a greener future remain intact (high oil prices, public and private institutions thirsting for sustainable energy, etc.) the will of investors to “punt” yet again will not hold out forever. This is especially the case in the context of other areas of the market that show a more transparent (and more rapid) path to profits.

It should be noted that the venerable VC firm Kleiner Perkins, which had funded a vast array of clean tech enterprises has publicly acknowledged that, while it is not abandoning clean tech, it is getting back to its roots by investing more in internet, social media, software and other associated tech offerings- all categories that require significantly less capital than clean tech offerings. Still, while it would be premature to think that VC’s are abandoning ship ($4 Billion was committed to clean tech in the last quarter alone) it is clear that expectations are clearly being recalibrated. Valuations have subsequently dropped as the price of risk is recalculated.

What does this mean for biofuel makers and their investors? Essentially the markets are asking for fewer long term science experiments, greater transparency and ultimately more pragmatic avenues to cash flow. It is fine to announce a bevy of partnerships with the big oil majors and consumer product companies, who clearly want exposure to the potential of cheaper and more sustainably produced compounds. But it is far better to announce real revenue and profits that culminate from such ventures. That eureka moment when products have been successfully created profitably and at scale has been more elusive than expected.

As an aside, it raises the question- why are the markets even underwriting companies that are so far from commercial applications of their science? Clearly venture investors still believe the returns will support the investments, yet shouldn’t this research be the domain of major research universities and government institutions with a huge stake in lower carbon emissions and energy derived from more stable sources? If the U.S. government can subsidize an extremely profitable oil industry to the tune of $41 billion a year (mostly in the form of miscellaneous tax breaks), why can’t we co-opt this credit and instead support those companies whose prospects are promising but may need a bit more time before being asked to manage Wall Street’s expectations on a quarter by quarter basis? Maybe some hybrid approach of public and private partnership would have been a more feasible approach for many of these firms whose success is so critical to a diverse set of constituents. These firms now exist in a sort of a market “purgatory”: Too promising to give up hope and yet here we are and the game is on and the clock keeps ticking.

Disclosure: I am long AMRS, CDXS.